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  • 1. 1 EC260: The Political Economy of Public Policy Session: Two Prerequisites: Introductory microeconomics, basic knowledge of calculus and statistics Dr Torun Dewan Dr Valentino Larcinese Does democracy promote economic growth and welfare? What determines the size and evolution of the welfare state? Is regulation done in the interest of consumers? To answer these and many related questions it is necessary to understand the relationships between politics and economics. Governments and political processes define the boundaries of economic relationships and the rules of market interactions. Moreover, governments themselves allocate resources and these allocations reflect complex political bargaining. Understanding the interaction between politics and economics can help us to gain insight into the key questions of public policy making. This course will examine public-policy making, its characteristics, determinants and consequences in liberal democracies. The course will first provide theoretical foundations from both economics and political science and then examine a number of topics from both theoretical and applied areas of political economy: collective action, electoral competition, fiscal policy and redistribution, bureaucracy, rent-seeking, regulation, information and accountability, constitutional reforms. The course is organized around 12 lectures (3 hours each). Each lecture will cover a topic and classes (1 hour each) will then be devoted to solve problems and discuss specific questions related to that topic. Problems and questions on each topic will be distributed during the first lecture. Assessment. This course is assessed by one written examination at the end of the course. This will account for 50% of the mark. Additionally, students are required to write a 5,000 words essay that will account for the remaining 50% of the final mark. A list of essay titles will be distributed during the first lecture. Texts Main Textbook Kenneth A Shepsle Analyzing Politics London: W.W. Norton (2010) & Mark S Bonchek (This is an excellent introductory text that you will certainly find useful as the main text during this course)
  • 2. 2 Useful books for beginners D.C. Mueller Public Choice III, Cambridge: Cambridge University Press (2003) (Library reference: JF.1001.M94). (This is a very useful reference text for this course which will cover much of the material. It can be usefully complemented by other readings that will be indicated in the syllabus). P. Dunleavy Democracy, Bureaucracy and Public Choice (Hemel Hempstead: Harvester-Wheatsheaf, 1991). (Useful for some topics on elections, parties, interest groups and bureaucracies). P. A. McNutt The Economics of Public Choice, Second Edition, Aldershot, Edward Elgar, 2002. (Okay for selected topics, but not comprehensive for this course) A stimulating read, definitely recommended: A.K. Dixit: The Making of Economic Policy, The MIT Press, 1996. Advanced Textbooks These two books are harder but some might enjoy: Allan Drazen Political Economy in Macroeconomics (Princeton, 2000) Torsten Persson Political Economics: Explaining Economic Policy, & Guido Tabellini MIT Press (2000). Classic Books A. Downs An Economic Theory of Democracy (New York: Harper and Row, 1957). M. Olson The Logic of Collective Action (Cambridge, Mass: Harvard Univ Press, 1965). W. Niskanen Bureaucracy and Representative Government (Chicago: Aldine-Atherton, 1971), now republished as Bureaucracy and Public Economics (Edward Elgar, 1995) Journals which are especially useful for this course are American Political Science Review, American Journal of Political Science, Journal of Political Economy, American Economic Review, Quarterly Journal of Economics, Journal of Theoretical
  • 3. 3 Politics, Public Choice, British Journal of Political Science, Economics of Governance and Economics and Politics. In the following, readings marked * are recommended. Syllabus and Reading List 1. Introduction to Political Economy. Rationality and methodological individualism. Preference Aggregation and Manipulation This lecture will introduce the basic method of political economy. We will explore the possibility of aggregating individual preferences into collective decisions and the challenges that this process poses. *Drazen, A. Ch. 1. *Persson, T. & Tabellini, G. Ch. 1. *Mueller Chs. 23, 24, 28. Shepsle & Bonchek Chs 1-4 2. Public goods and the collective action problem. The particular characteristics of public goods pose a number of problems for what concerns their supply. Free-riding and collective action problems will be analysed with the aid of simple game-theoretic concepts. *Mueller Ch.2 *Shepsle & Bonchek Chs. 8-10 M. Olson, The Logic of Collective Action, pp. 1-16. K. Dowding, Power (Buckingham, Open University Press, 1996) ch. 2. 3. Elections and public policy. Majority rule The majority rule has a special place in collective decision-making. We will see why and will analyse electoral competition in majority systems. We will derive several results on public policy formation under majority voting *Mueller Ch. 5, 11 Shepsle & Bonchek Ch. 5
  • 4. 4 Persson & Tabellini Ch. 3 4. The public choice of redistribution. Welfare spending and the size of the public sector Why countries with apparently very similar economic characteristics differ in the amount of resources that are redistributed to the poor? We will use the models developed in lecture 3 to analyse welfare spending and the size of the public sector *Mueller Ch 19. *Drazen. Ch. 8. *V.Larcinese Voting over redistribution and the size of the welfare state: the role of turnout. It will be downloadable from the author’s web page. J. Cullis & P. Jones Public Finance and Public Choice, McGraw-Hill, Ch. 14 Persson & Tabellini Ch. 6. A. Meltzer A rational theory of the size of government, Journal of & S. Richards Political Economy, 89, 914-927, 1981 Husted, T.A &, The Effect of the Expansion of the Voting Franchise and L.W. Kenny: the Size of Government, Journal of Political Economy, 105, 54-82, 1997. P. Lindert What limits social spending?, Explorations in Economic History, 33, 1-34, 1996 R. Perotti Income distribution and investment, European Economic Review, 38, 827-835, 1994. 5. Information, mass media and public policy The mass media appear to be increasingly important in elections. Ultimately they might have a powerful influence on public policy. Is this true? And if yes, to which extend? We will analyse several theories of mass media influence in politics and have a look at what the data say. *V. Larcinese Information, Elections and Public Policy. It will be downloadable from the author’s web page.
  • 5. 5 * A.Prat & D. Stromberg (2010): "The Political Economy of Mass Media, mimeo, downloadable here: http://econ.lse.ac.uk/staff/prat/papers/mediasurvey.pdf V. Larcinese: The Channeled Italian Voters, in F. Padovano & R.Ricciuti (eds) “Italian Institutional Reforms”, Springer 2007. S. Della Vigna & M. Gentzkow (2010): Persuasion : Empirical Evidence, Annual Review of Economics, 2010, Vol.2 * S. Della Vigna & E. Kaplan (2007) The Fox News Effect: Media Bias and Voting, Quarterly Journal of Economics, August 2007, Vol. 122, pp. 1187-1234. 6. Electoral rules and policy outcomes Institutions might influence the way voters and their elected representatives act. Thus, constitutional rules might have important consequences for public policy. We will focus on electoral rules and their impact on the provision of public goods and overall public spending. *Mueller Ch. 13 Persson & Tabellini, Ch. 10 Shepsle & Bonchek Chs. 11, 12 A. Lijphart Patterns of Democracy, Yale University Press, 1999, Chs. 1, 8 7. Legislative Behaviour 8. Time Inconsistency and Institutional Design 9. Accountability 10. Democracy and Dictatorship 11. Corruption and Accountability 12. Bureaucracy